Empowering the Next Generation
Children and Money, Part 3 of 3
When entrepreneurs are on the verge of selling their companies and monetizing their life’s work, they inevitably wonder, “How will this affect my children?”
Questions about how and when to convey and distribute financial liquidity to the next generation are always complicated by a tangle of priorities, needs, roles, and dynamics. Financial choices can become even more fraught in blended families or in situations where children weren’t introduced or acclimated to financial realities from an early age. The process of transferring wealth is a deeply personal decision, one that demands both art and science.
Recently, I sat down with a second-generation entrepreneur who was frustrated that his parents’ estate plan was still incomplete simply because they wouldn’t open up and involve him and his sister, both in their 50s, in key discussions. Determined not to make the same mistake, this man is working to instill values and an appreciation of legacy in his own children—beyond the basics of teaching them how to handle money.
As your children grow into adulthood, look for ways to increase financial transparency. Share more details of your balance sheet and have frank discussions about long-term values. One day, when your will is read, you don’t want your own children taken by surprise or unequipped to handle their new privileges and responsibilities.
Starting Important Conversations
Whether you and your children speak over Sunday dinner or at a regularly scheduled quarterly meeting, look for opportunities to communicate about money and its significance. Here are questions that can spark meaningful conversation:
- What does money mean to you?
- How do you see your life being different as your wealth increases?
- What causes are you passionate about? How do you want to support that cause?
- What confuses you about money and investing? What worries you? What excites you?
- Who would you trust to talk about money and help you make important financial decisions?
- What are big goals you have, and how does money matter to those goals?
As your family talks about these topics together, opportunities to teach and explain will arise naturally. Anytime that a child or young adult feels their thoughts and ideas are heard and matter, they become more receptive to learning. Take advantage of those precious “teachable moments.”
Unilateral Decisions and Unintended Consequences
Families may assume their kids are responsible enough to handle a lump sum inheritance, but brains are still developing into their mid-20s. As such, it’s not unusual to witness foolish or imprudent decisions from young people. I personally knew one family that set up a trust to give each child a lump sum of a quarter million dollars at age 21.
When the eldest child came of age, he invited his fraternity brothers on an all-expenses paid Caribbean vacation, purchased a high-performance sports car, and then blew the balance on excessive partying and drugs. The middle child decided to invest in a new boutique in a high-rent retail district. Six months later, the boutique and inheritance were both gone. The youngest child parked his inheritance in mutual funds while he studied for a career in aviation. By the time he became a well-paid pilot, his original nest egg had grown into the millions.
As this tale illustrates, one size doesn’t always fit all when it comes to transferring wealth. Here’s another type of example: you might hope to motivate your children by providing a dollar from the trust for each W-2 dollar they earn. That might sound good in theory, but what if one child hopes to go into religious service, become a teacher, or work for a not-for-profit? You have inadvertently penalized the individual whose calling is inherently less lucrative.
It’s natural that when parents come into wealth they take pleasure in gifting money to their children, but impulsive generosity can have hidden drawbacks. One newly wealthy couple watched their daughter’s young family struggling. They said, “Wouldn’t it be nice to buy them a new car?” And then, “Let’s buy them a new house.” The son-in-law resented his in-laws’ help, thinking, “I am responsible for providing for my family, and I can’t afford to do this. I want to be the one who gives to my children.”
When it comes to gift-giving, we find less family strife when there’s more communication and shared control. For example, you can have a direct conversation in which you express your willingness and ability to help financially. Then ask for input about the manner in which your children prefer your involvement. If the decision is a joint one, you have more buy-in and a greater comfort level.
Put Flexible Documents in Good Hands
Because the wealth disbursement structure suited for one child may not work for another, it’s fine to be creative and devise separate arrangements based on the best interest of each child. For example, one sibling may need ongoing medical care that would be best covered in smaller incremental or monthly payouts, while the other sibling could be suited to take full ownership of their inheritance. If you do choose to customize the strategy for each child, it is imperative to explain and discuss this with everyone upfront. When parents take full responsibility for the decision, they prevent misplaced resentment between siblings. You want to protect the next generation’s wealth without sacrificing family relationships.
When setting up a trust for future generations, we encourage you to empower the trustee with flexible documents. Flexible documents support highly customized decisions. Not every child is a straight-A student or a productive, solid member of society. One child might struggle with addiction issues. In that case, the trustee could require the child to take a monthly drug test before receiving a payout. Another child might have special ongoing expenses due to a serious physical or mental condition. The value of the trust is not just to protect the assets for future generations, sometimes it’s to protect the beneficiary from themselves.
Flexible documents can allow the trustee to say, “I’m going to pay out enough money for the down payment on a house,” or “I’m going to distribute money for education,” or “I’m going to distribute money for healthcare,” as opposed to, “I’m just giving you a rote payout at a periodic interval.”
Developing a Healthy Attitude
It’s a truism that significant wealth does not guarantee happiness. When investments and assets accumulate, so can stress. An affluent life has many layers of obligation and complexity, from over-scheduled days to the administration of multiple residences, and maintenance of expensive hobbies and diversions.
From an early age, children watch their parent, the entrepreneur, sacrifice and build the business. They see phone calls after dinner and constant email and shortened vacations. They see it, and—if the right conversations and lessons in financial responsibility began early—grow up to understand how hard their parent worked to achieve first-generation wealth. When kids understand and appreciate what it takes to build a business, they’re going to be better able to manage it.
Just as importantly, kids need to see their parents’ priorities in action. One successful entrepreneur wanted to move the needle and give back to at-risk youth. He talked about this goal often at family dinners and at regularly scheduled family meetings. He and his wife encouraged their children, “Go find your passion and we will support it.” Those kids became doctors and researchers and teachers. They had the privilege of serving the family’s higher purpose and completing their higher education without debt. In this way, their wealth became special and meaningful as opposed to spoiling them.
Grooming children for healthy affluence goes beyond signing the right documents. It’s an ongoing process that starts at home and continues beyond college graduation. With your guidance, your children can develop a healthy attitude about money that will help guide sound financial decisions throughout adulthood.
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